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FRED
10-15-07, 01:58 PM
http://www.itulip.com/images/inflateordie.jpgThe "inflate or die" fund... under the placid surface

by Dave Lewis - Dude, Where's the Dharma? (http://dharmajoint.blogspot.com/2007/10/inflate-or-die-fundunder-placid-surface.html)
"Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it." Paul Volcker, Apr. 10, 2005 (http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html)
Paul Volcker's sense that something was rotten "under the placid surface" came to mind while reading news of the letter begging for inflation which inspired Friday's "Inflate or Die" post (http://dharmajoint.blogspot.com/2007/10/inflate-or-die-letter.html) or today's news (http://www.forbes.com/business/2007/10/13/banks-siv-treasury-biz-wallst-cx_pm_1013citicorp.html) that those same financial institutions were thinking of setting up a new fund.
"Leading U.S. banks have reportedly been meeting with U.S. Treasury officials about creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch."
I'll go further and put two and two together. On the one hand many of the largest financial institutions in the world are asking financial authorities to "expand the range of acceptable collateral and increase the availability" of “cross-border collateralisation” so "banks can trade in a wider variety of risky assets in return for short-term loans to finance their activities and clients." On the other hand these same institutions are thinking about setting up a new fund (and what's a new fund without a nice new jargon-rich name like Structured Investment Vehicle) into which they will "park" their non-performing mortgage (et al) debt.

If you're wondering how such a "placid surface" is maintained, consider this. If you knew that you could hide your bad investments in some drawer and they wouldn't come back to bite, you wouldn't need to worry about stop loss selling, or anything of that sort. In that event you could just keep buying.

According to Reuters (http://www.reuters.com/article/topNews/idUSN1328788720071014?feedType=RSS&feedName=topNews&rpc=22&sp=true), "taxpayer money is not expected to be used." Of course, if the Fed and other CBs are willing to accept the "assets" in these new funds as collateral then, ultimately, it doesn't much matter if the Treasury funds the endeavor (which the Fed would eventually monetize) or if the Fed monetizes it directly. If one thinks of the US$ as the stock of the United States, this is dilution, no matter how you slice it.

On Monday I'm going to explore these Structured Investment Vehicles (SIVs), mainly because I too want to be able to make a bunch of really stupid investments and then push them off my balance sheet, at the expense of the Fed, mind you. Inquiring minds want to know how to do it.

Charles Mackay
10-15-07, 04:10 PM
You mean they actually needed MORE than the $200 million fund that the Democrats proposed to solve the problem ? ;)

GRG55
10-15-07, 05:37 PM
http://www.itulip.com/images/inflateordie.jpgThe "inflate or die" fund... under the placid surface


by Dave Lewis - Dude, Where's the Dharma? (http://dharmajoint.blogspot.com/2007/10/inflate-or-die-fundunder-placid-surface.html)
"Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it." Paul Volcker, Apr. 10, 2005 (http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html)

Paul Volcker's sense that something was rotten "under the placid surface" came to mind while reading news of the letter begging for inflation which inspired Friday's "Inflate or Die" post (http://dharmajoint.blogspot.com/2007/10/inflate-or-die-letter.html) or today's news (http://www.forbes.com/business/2007/10/13/banks-siv-treasury-biz-wallst-cx_pm_1013citicorp.html) that those same financial institutions were thinking of setting up a new fund.
"Leading U.S. banks have reportedly been meeting with U.S. Treasury officials about creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch."
I'll go further and put two and two together. On the one hand many of the largest financial institutions in the world are asking financial authorities to "expand the range of acceptable collateral and increase the availability" of “cross-border collateralisation” so "banks can trade in a wider variety of risky assets in return for short-term loans to finance their activities and clients." On the other hand these same institutions are thinking about setting up a new fund (and what's a new fund without a nice new jargon-rich name like Structured Investment Vehicle) into which they will "park" their non-performing mortgage (et al) debt.

If you're wondering how such a "placid surface" is maintained, consider this. If you knew that you could hide your bad investments in some drawer and they wouldn't come back to bite, you wouldn't need to worry about stop loss selling, or anything of that sort. In that event you could just keep buying.

According to Reuters (http://www.reuters.com/article/topNews/idUSN1328788720071014?feedType=RSS&feedName=topNews&rpc=22&sp=true), "taxpayer money is not expected to be used." Of course, if the Fed and other CBs are willing to accept the "assets" in these new funds as collateral then, ultimately, it doesn't much matter if the Treasury funds the endeavor (which the Fed would eventually monetize) or if the Fed monetizes it directly. If one thinks of the US$ as the stock of the United States, this is dilution, no matter how you slice it.

On Monday I'm going to explore these Structured Investment Vehicles (SIVs), mainly because I too want to be able to make a bunch of really stupid investments and then push them off my balance sheet, at the expense of the Fed, mind you. Inquiring minds want to know how to do it.

Could it be that two months on since the Fed lowered the Discount Rate and invited the banks to use MBS as collateral, that the short term roll overs need to come to an end and the banks need another solution to replace the Fed as lender?

Once again, if this is a constructive step towards objective price discovery it will be a useful action. If, on the other hand, it's just the banks shuffling this stuff among themselves, the author's allegations have merit - it's just more financial engineering...

jk
10-15-07, 05:57 PM
according to a bloomberg story, the entity is aimed at unfreezing the ab commercial paper market. and...


While the banks are still deciding which assets to buy, the entity will purchase highly rated securities, the banks said. It probably won't buy subprime mortgage assets, according to the people familiar with the agreement, who declined to be identified because some terms weren't made public.
http://www.bloomberg.com/apps/news?pid=20601010&sid=aCWgTl7rA6i4&refer=news

GRG55
10-16-07, 09:48 AM
according to a bloomberg story, the entity is aimed at unfreezing the ab commercial paper market. and...


http://www.bloomberg.com/apps/news?pid=20601010&sid=aCWgTl7rA6i4&refer=news

OK. Then the next question that comes to mind is what happens to the lower grade paper that the new entity will not purchase? If it stays in the original SIV then it may eventually end up on the balance sheet of the bank backing the SIV. Doesn't that defeat the (popular view) prime purpose of this new Super-SIV as a mechanism for the banks to avoid bringing this stuff on their balance sheets?

Murky would be a charitable description...

0tr
10-16-07, 04:05 PM
"Leading U.S. banks have reportedly been meeting with U.S. Treasury officials about creating an up-to-$100-billion fund to stave off the danger that there could be a fire sale of shaky mortgage-backed securities, collateralized debt obligations and other distressed assets following the recent global credit crunch[/I]."


When/If a financial crisis erupts, I expect that 'bank holidays' will last for months at a time, so that no transactions of any kind will occur. That and infrastructure stoppages. No internet, no data transmission etc. What crisis? the trading floor is closed. Roosevelt closed banks for extended periods to stop runs on banks.

At any time there exists a large overhang of securities that may be tipped into markets. But it will be prevented by turning off the power, or some other such expedient.

algerwetmore
10-17-07, 06:14 PM
Instead of shutting down the markets completely, could there a tax or fee for people trying to expatriate their usd$ to other currencies?